New RBI Governor Points to Inclusive Development for India

Last week, Raghuram Rajan was officially inaugurated as the 23rd Governor of the Reserve Bank of India. Rajan’s appointment has been greeted by a near obscene amount of excitement and adulation here in India, even by the standards of an often excessive Indian press. The front page of The Economic Times on Thursday (image at right) has Rajan sliding across the page, James Bond-style, rupee-barreled gun in hand. I am very much looking forward to seeing Janet Yellen or Larry Summers do the same.

Rajan’s academic credentials and work experience are indeed impressive – his previous position was chief economic adviser to the Prime Minister, and before that he was chief economist for the International Monetary Fund – but his main claim to fame is correctly predicting in 2005 that risky credit markets in the U.S. could lead to a global financial crisis. That position brought him much derision at the time, including from the likes of Larry Summers, but have of course since proven to be prescient.

But regardless of the strength of his professional and academic background, Mr. Rajan faces a herculean task as the new RBI Governor of a nation facing some serious economic crosswinds. India’s economy is growing at its most tepid pace in four years, its stock market has tumbled in recent months, and inflation continues to rise unabated. Perhaps most strikingly, the rupee has devalued versus the dollar by nearly 20 percent over the last four months. In the meantime, a national election is coming in the spring, which has effectively made consensus and compromise in the always partisan Indian government nonexistent. It will take all of Rajan’s skill to right the ship.

For those of us in the financial inclusion industry here in India, expectations are doubly high. India’s broader travails as an economic laggard affect us deeply, and Rajan’s initial statements and actions as Governor imply, at least, that he is willing to make big changes to help solve short-term monetary ills. If the initial reaction is any indication, Rajan’s presence and changes could actually help – the rupee rose 2.1 percent against the dollar and the Sensex index jumped 2.5 percent on Thursday. Getting India back on track is crucial for the financial inclusion space – low economic growth and persistent inflation hurt low-income populations in many different ways, including leading to fewer construction and manufacturing jobs and higher food prices.

But outside of getting through this crisis, we in the financial inclusion industry also have a vested interest in much more progressive and inclusive RBI policy that will extend beyond simply righting the ship in the short term. It was therefore encouraging and exciting to see, in his first speech as acting RBI Governor, Rajan lay out persuasive arguments and ideas for better ways to ensure financial inclusion in India over the long term. He discussed making it easier for banks to open new branches, the importance of issuing more and different banking licenses, and he has asked Nachiket Mor to “head a committee that will assess every aspect of our approach to financial inclusion to suggest the way forward.” Rajan’s statement, under a section of the speech titled “Inclusive Development,” was music to our ears: “We need faster, broad based, inclusive growth leading to a rapid fall in poverty.” A recent IFMR blog on this topic, speaks eloquently about the continued difficulty of formal financial access for most Indian households, and Rajan’s ideas for solutions.

Rajan also spoke specifically about a number of technology-related initiatives that could significantly alter the financial inclusion landscape in India. He talked about exploring new mobile-based payments which would allow users to transfer funds using encrypted SMS across different telecom service providers and different kinds of handsets. He discussed the need for more “white label” ATMs run by non-bank entities across India, which could vastly improve the access to financial services for households in rural areas. And importantly, Rajan discussed changing the rules so that pre-paid cards and electronic wallets can be used to actually withdraw cash when tied to Aadhaar, the Unique Identification Number (UID) which the government will eventually issue to every Indian. This change could significantly ease the ability of non-banked customers to finally send payments and remittances across the country.

These are big and worthy ideas and they are very exciting for us at Accion Venture Lab, a seed-stage investment initiative that provides capital and support to innovative financial inclusion start-ups, particularly those using technology to enable new business models across payments, credit, savings, insurance, and more. As we continue to work with more and more entrepreneurs in India who are hoping to help solve big financial inclusion challenges, it is encouraging that the senior-most banking regulator in the country is also thinking actively about how technology can play an important role in getting financial services to the under-banked. Time will tell if Rajan’s appointment will truly herald big changes in RBI policy, but we are certainly excited to find out.

Vikas Raj is a senior investment officer at Accion, leading Venture Lab’s work in Asia. Prior to joining Accion, Vikas worked in investment banking at Evercore Partners, where he advised on multiple corporate transactions with aggregate value of over $45 billion. Previously, Vikas worked in microfinance, primarily in India, at Ujjivan and Catalyst Microfinance Investors (CMI). At Ujjivan, Vikas co-led the establishment of the firm’s first lending branches in Delhi and helped lead the firm’s Series B financing round. At CMI, Vikas was responsible for establishing and investing in the Fund’s greenfield MFIs, including their largest investment, in an Indian institution. Vikas also co-led Columbia Business School’s student-run Microfinance Investment Fund. He started his career at Deloitte Consulting, where he was in the Corporate Strategy group.

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The views and opinions expressed on this blog, except where otherwise noted, are those of the authors and guest bloggers and do not necessarily reflect the views of the Center for Financial Inclusion or its affiliates.

This is a good blog and also an interesting speech by the new RBI Governor. It is certainly encouraging that he mentions financial inclusion and has tasked Nachiket Mor with recommending a forward-looking strategy. On the other hand, the Governor neglected to mention NBFCs, Section 25 companies and associations and the role they play in providing financial services to the poor. It is important that these types of financial service providers and the social entrepreneurs who run them are given support and access by the RBI as financial inclusion plans are developed and implemented. In recent years they have been whipsawed by rapidly changing policies that have not always been realistic or phased appropriately. There has been talk of renewing the idea of “limited license banks” which NGOs and other nonbank MFIs could transform into, and this could be a very positive development.

In addition, the Governor as well as the blog writer seems to put a lot of stock in technology solutions to financial exclusion. While technology does have a role to play in financial inclusion, it rarely has a big impact without strong institutions with a local presence and people dedicated to making them work for the poor and working out the “last mile” kinks. Finally, it would have been good if the Governor had explicitly mentioned client protection, and evolving international norms, in the context of loan recovery.

Dear Mr. Vikas Raj
I am not agree what you expressed and also RBI governor for sake of global impression.
Do you that how many people have Addar cards even today? do you know that what is the real poverty in India according to world Bank report?
But there are mushroom NBFC companies are working in the name of poverty and financial inclusion..

Do you have any data on what is the status of each state? each district? each Block/mandal? and each Panchayat? and each village finally each household?

Now the companies trends are to increase their profit based on Financial inclusion such Technical companies are playing blood sucking games, NBFC are mapping for them and microfinance institutions showing the path to such the blood from each poor household at grassroots level.

Like you people need to servery in global market, only this reason your making good article for global market impression.

To day poor is more poor and middle class is more middle class due to like you investment companies and policies and India policies.